Question
ATR Ltd manufactures sidewalk chalk which it sells online by the box .Company uses an actual costing system, which means that the actual costs of
ATR Ltd manufactures sidewalk chalk which it sells online by the box .Company uses an actual costing system, which means that the actual costs of direct material, direct labour,and manufacturing overhead are entered into work-in-process inventory. The actual application rate for manufacturing overhead is computed each year; actual manufacturing overhead is divided by actual production (in units) to compute the application rat, companysuffered a loss for the first month of operations by using variable costing system. The loss created a serious problem because company was planning to use the statement to encourage investors to purchase the stock of the company. Some other relevant data is given below:
- Units produced during the first month:50,000 units
- Units sold during the first month:40,000 units
Other data:
- Direct materials: Rs.2.00 per unit
- Direct labor: Rs.1.60 per unit
- Variable manufacturing overhead: Rs.0.40 per unit
- Variable selling and administrative expenses: Rs.1.50 per unit
- Selling priceRs.40
- Fixed manufacturing costRs.1800,000 per year
- Fixed Selling & Admin expensesRs. 480,000 per year
Required:
- How much loss was suffered by using variable costing method in the first month of operation?
- What costing method should be used by the company forpreparing income statement for stock holders? And why?
- Can an absorption costing income statement show a profit rather than loss? Support your answer by preparing a reconciliation schedule.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started